Friday Thought - Pricing
**Friday Thought: Pricing ** Hi Everyone, Here’s a “Friday Thought” for y’all on pricing. It’s a topic I talk to a lot of you about during your support period. As an overarching statement you all need to charge more (and shouldn’t feel worried about doing it at all). But that general sentiment aside here are some techniques and approaches to help you cost your product or service effectively:- Bottom up:
- Cost based pricing: This is a very simple model and probably the easiest one to explain and do. First you need to know what your variable costs per unit sold are, then you add on a profit margin and, wham, you have a price. For instance, you might be selling a bar of chocolate: it costs 40p to produce, you want a 40% profit margin (27p), so you add this on top of the product to give you a price of 67p. (see attached table for how this was worked out)
- It’s worth noting this is a simple model, it’s a great place to start, but you do need some industry knowledge (what’s a reasonable profit margin, reasonable cost base, what margin do you need to overcome fixed costs associated with the business etc) to make sure you are charging enough, able to grow and making a reasonable profit
- Top down:
- Customer value-based pricing: this slide deck shows you a lot of different strategies in one go: https://www.linkedin.com/posts/robinchu_first-5-out-of-10-only-pricing-strategiesrobin-ugcPost-6564444065209872384-ndke/ and is a great place to start. Here’s probably the best thing to think about when talking “top down” pricing:
- Competitor based pricing: this requires a bit of research to get started, you need to spend time finding out how much your competitors charge their customers for similar/competing services. Once you’ve gathered this information you need to decide how you’ll compete with them, are you going to be a budget option that undercuts the market? Or will you be a premium or “luxury” offering? Etc. From here (once you’ve established your price point) it’s almost the reverse of bottom-up pricing, the aim of the game is to make your variable costs less than the price you’ve established and still keep a healthy profit margin.
- Contrast: if you have a few different packages and want to play them against each other to encourage customer to buy you can explore this avenue. An easy way to think about it is small, medium and large popcorn boxes at a cinema, you can find more about it here: https://personalmba.com/contrast/
- Freemium: Freemium is a business model in which you offer a basic plan, product or service, with few resources, completely free, for users to know about it. At the same time, you offer another more complete plan, more advanced service or additional features in exchange for a fee – the premium option. The freemium business model is often identified as the “business model of the Internet.” That is because, on the worldwide web, it is common to use the strategy of offering something for free, with a small customer acquisition cost, but potential sales growth in the long run. You can find out more here:
- https://businessmodelanalyst.com/freemium-business-model/
Here’s an extra very social enterprise-y one “the Robin Hood model” in this approach you charge customers who can pay more a higher rate, and those that can’t afford your services at your “standard” rate are charged less/provided it for free. It’s a complex model to get right, but it’s one we often see entrepreneurs using as it allows their services to get in the hands of those that need it most. (PS: I don’t know if it’s actually called “the Robin Hood model” I’ve just heard it referred to as that a handful of times, there might be a better name for it knocking around somewhere)
I’ve attached a document which goes into this in a lot more detail on pricing and is another handy resource to look at. Likewise, I’d encourage anyone that’s reviewing or establishing their price(s) to do a thorough sweep of their finances and understand what they need now and in order to grow into the organisation you hope to become. The list above is exhaustive by any means but it’s a good place to start. Do reach out to me if you want to go through pricing together. All the best and happy to answer any Qs. Tim
Pricing strategies
**Pricing **strategies overview (LM – June 2021) There are many different pricing strategies but all build upon three areas – customer, cost and competition. Once the social entrepreneur is confident in these areas you can look at more complex pricing strategies. Cost-based pricing- Map out products/services in detail – what is the customer paying for? What are the variable costs?
- Demonstrate variable costs on graph, and show current profit margin
- Show this against fixed costs Competition-based pricing – see competitor mapping
Downloadable Resources
- [Costing and pricing a product or service](/product/assets/Costing and pricing a product or service.pdf)
PDF